Australia | Jul 22 2014
-Upside from alternative financial markets
-Positive credit referencing potential
-New ID and risk-based services
By Eva Brocklehurst
Veda Group ((VED)) sustained a pullback in consumer credit enquiries in the June quarter but this was not a surprise to brokers. The March quarter was the strongest quarter for Australian consumer credit growth since 2008. Moreover, with supportive changes to Australian consumer law, brokers envisage plenty of opportunity stemming from growth in alternative financial markets.
Macquarie is the latest broker to have initiated coverage of Veda Group, setting an Outperform rating and $2.27 target. The broker is attracted to the diversification opportunities presented by non-financial businesses. Comprehensive credit reporting services provide an added bonus. Veda conducts credit checks on consumers and businesses for the insurance, automotive and property sectors. At 63% of sales, Veda's income is heavily skewed to the traditional financial industry but the company has started to unlock opportunities that exist in adjacent businesses. By comparison, the company's international peers generate 60-70% of sales from alternative markets and Macquarie suggests diversification could drive 5-year compound annual growth rates of 11%.
The financial services industry is witnessing significant disruption from new financial competitors in both the provision of credit and in payments systems. Veda can leverage this disruption by partnering with new networks, in peer-to-peer lending and via retail aggregators, with Macquarie envisaging potential upside of 7-10% of earnings from these product offerings alone. Veda is making inroads into new segments with ID verification and risk-based products and services. UBS believes Veda's growth prospects in the near term will be underpinned by identification services and access to the Personal Property Securities Register (PPSR). The PPSR is the single national source of registered security interests in personal property. Veda has an established search function for the register, called VedaCheck, which saves customers time and money.
Credit referencing is another compelling opportunity. Comprehensive, or positive, credit reporting sounds like it has been around for ages. The fact is that until March this year, following changes to the law, only negative credit data could be collected. Having insights into a customer's credit worthiness enables businesses to evaluate risk more thoroughly. Moreover, a customer's payment history is a strong predictor of future behaviour, enabling marketing potential. Still, Macquarie observes the case for using Veda as a source of credit checks may not be so compelling from the point of view of the main users of credit information – the banks. Achieving critical scale is necessary in the long term for comprehensive reporting to add an extra string to Veda's bow and at present the broker does not include any revenue from this area in valuing the stock.
It would be helpful to have a major bank in Veda's camp. At present none have opted in. In Macquarie's view, targeting the rest of the market means a delay in getting to a level at around 40% of the market that seems necessary for critical mass. The major banks stand to lose some competitive advantage from participating, while the benefits from comprehensive reporting include lower credit losses and increased lending volumes. Australia has few major banks and competition is fierce so there is less incentive to share customer data. Nevertheless, in those countries which have adopted positive reporting, credit bureau volumes have doubled. This represents a significant opportunity for Veda as the incumbent bureau in Australia.
Veda does not have the market to itself. Many of its peers have moved aggressively to leverage credit-based information. Macquarie notes Dun & Bradstreet has a significant non-financial services exposure while Experian has also moved to expand its market position, given its role as a credit bureau in many markets. Areas which provide opportunity for Veda, and where global peers are active, include fraud prevention, corporate and consumer scoring and marketing. If developments go Veda's way Macquarie thinks comprehensive credit reporting will be a game changer, envisaging 30-40% upside for the stock.
The biggest risk Veda faces is security breaches or unfavourable regulatory changes.The business has significant technology and operational risks given the sensitive information that is stored and transmitted to numerous customers through multiple channels. The business is also subject to changes in legal and regulatory requirements from time to time. Veda also operates in the Middle East and Asia. In 2013 Cambodia improved access to credit information by establishing its first private credit bureau with Veda.
On FNArena's database there are one Buy and three Hold ratings. The consensus target is $2.18, with Macquarie's $2.27 now second of the range, only beaten by Deutsche Bank's $2.35. Citi is the low marker with a target of $1.99. The new consensus target suggests 16.1% upside to the last share price.
Despite the recent pullback, Veda Group shares are still trading on 20x FY15 consensus earnings per share, implying a forward dividend yield of 2.3%.
See also "Brokers Check Out Veda's Advantages" from January 21.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
